NZ dollar outlook: overdone kiwi may decline, Fonterra scare weighs heavily

The New Zealand dollar may decline this week as some traders deem its recent rise above 80 US cents as overdone and as potential damage to exports from a food contamination scare at dairy giant Fonterra weighs on sentiment.

The kiwi may trade between 75.50 US cents and 80.60 cents this week, according to a BusinessDesk survey of 10 traders and strategists. Five expect it to fall this week, two expect a gain, while three say it will remain neutral. Still, one of those expecting a gain said he was unsure about the effect of Fonterra.

The kiwi recently traded at 77.41 US cents, from 77.30 cents at 8am in Wellington.

It plunged this morning after Fonterra, the nation's largest exporter, said on Saturday it had found bacteria which can cause botulism in some of its dairy products, prompting China and Russia to ban products, according to media reports. Also weighing on the kiwi, some traders said its recent gains on expectations of future interest rate rises was overdone.

"I've been quite bearish on it in the last couple of weeks," says Tim Kelleher, head of institutional FX sales New Zealand at ASB Bank. "The market is probably a little bit too bulled up on how high New Zealand interest rates are going to go immediately. The risk is that once we start to sell off, we will see some momentum in it."

Reputational damage
Concern over Fonterra's exports and the reputational damage to New Zealand's "clean green" image will continue to weigh on the kiwi, he says. "It's not going to go away in a hurry. It's not going to blow away in a couple of days."

There may be more reaction to come once European markets open, he says.

As a result, there is likely to be more attention on Wednesday's dairy auction, Mike Jones, currency strategist at Bank of New Zealand, says in a note. Prices had been expected to hold up at elevated levels but it is possible they will now decline.

Fonterra said today none of the products sold on the GlobalDairyTrade platform are affected by the contamination scare.

Also on Wednesday, the statistics department publishes the latest labour market indicators. Salary and ordinary time wages probably rose 0.5 percent in the second quarter from a 0.4 percent gain in the first quarter, while the unemployment rate may have increased to 6.3 percent from 6.2 percent and the participation rate edged up to 67.9 percent from 67.8 percent, according to Reuters polls.

So far, there has been minimal evidence of rising wage pressures, however the Canterbury construction sector is the hot spot, driven by rebuilding following the earthquakes, and attention will be on any signs that this is spilling over into other sectors or regions, Robin Clements, UBS New Zealand economist, says in a note.

House price bubble
Further details on a house price bubble of concern to the nation's Reserve Bank will be revealed when state valuer QV publishes its latest figures for July on Thursday.

On Friday, the statistics department publishes the value of electronic card transactions for July, an indicator for consumer spending.

Meanwhile, the Reserve Bank of Australia is expected to cut its benchmark interest rate. Traders see a 91 percent chance central bank governor Glenn Stevens will lower the 2.75 percent benchmark rate after a meeting tomorrow.

Prime Minister Kevin Rudd's announcement at the weekend of a September 7 election may pull back some expectations for further interest rate cuts in September, supporting the Australian dollar, Sharon Zollner, senior economist at ANZ New Zealand, says in a note.

In comparison, traders see zero chance New Zealand's Reserve Bank will change interest rates at its next review on September 12. However, they are pricing in 75 basis points of hikes over the next 12 months, based on the Overnight Index Swap curve.

The kiwi may trade between 85 Australian cents and 89 cents this week, according to a BusinessDesk survey of 10 traders and strategists. Four expect the local currency to advance, while four expect it to decline and two say it will likely remain neutral.

"We were stretched quite highly on that kiwi/Aussie cross last week, we were recommending selling it," Mr Kelleher says. "The market has been a little bit bearish on Australia and a little bit too bullish on New Zealand."

Reserve Bank of Australia assistant governor (financial markets) Guy Debelle will speak as part of a panel at the Funding Australia's Future Form in Sydney on Wednesday, which will include a question and answer session and is open to the media.

Traders will be awaiting a slew of data on the Australian economy this week, including the trade balance, services manufacturing, house prices and job advertisements tomorrow, home loans and construction on Wednesday and employment on Thursday.

A "data dump" from China for the July month is also scheduled for later in the week and has the potential to impact the Australian and New Zealand dollars, Mr Jones says. On Thursday, China publishes its latest trade statistics, while on Friday it details inflation, producer prices and industrial production.

China is Australia's largest trading partner and is New Zealand's second-largest, behind Australia.

Other central banks likely to be in the news this week include the Federal Reserve which on Wednesday releases minutes from its June meeting, and the Bank of Japan, which reviews interest rates on Thursday.

(BusinessDesk)